Commentary on how China and the world are adapting to each other -- or not.

March 2011

March 24, 2011

This has nothing to do with China, so if you care about the Middle Kingdom, then flip to the next blog post. But if you care about basketball, read on.

In the Spring of 1989, I was a fourth-year student at the University of Virginia. UVa has many traditions that distinguish it from other schools. We don't say "campus," but "grounds." It's not "freshman," "sophomore," etc., but "first-year," "second-year," etc. And it's Mr. Jefferson, not President Jefferson, T.J., or any derogatory title. And at least in the 1980's, we wore coat and tie to the football games. And instead of a marching band, we had a pep band that raised hell.

Before I was addicted to China, I was a sports junky. And I still am. Tonight I'll be watching the Sweet 16 of the NCAA men's basketball tournament. But in 1989, I was in the stands with my friends. That year UVa had a pretty darn good team. A few years before, the UVa Cavaliers (or Wahoos) had been on top of the college b-ball world, with 7-4 Ralph Sampson leading the way. The Wahoos -- a fish that can drink its weight in beer -- were basketball royalty but could never get over the top in the NCAA tournament. Remember upstart Chamanade, the team that beat UVa in an early season tourney in Hawaii? Once Sampson left, UVa wasn't part of the discussion among elite teams, but it was still quite good, surprisingly good, in fact.

UVa made the 1989 tournament, I believe, as a 5-seed. It won its first two games without too much stress, at least, again, that's what I remember. Sitting in our apartment at the end of the first weekend, my friends and I looked at the TV and realized that the next round for us wasn't that far away, in Lexington, Kentucky, about an 8-hour drive from Charlottesville. Should we blow off classes right in the middle of the semester just for a game or two? And we were broke, could we afford tickets? We called, and the tickets were only $20/person for 3 games -- 2 on Thursday night for the Sweet 16 and 1 on Saturday afternoon for the Elite 8, with the winner going on to the Final 4. (Or was it $20 for each game? I don't care. I'm old and can't remember.) That settled it, we were going! We being: myself, Keith Kimberl, Chris Trimble, and Daren Blythe.

I was taking a few classes my last semester, but didn't care a whole lot about them, at least compared to going to game. I told my Chinese-language teacher I'd be busy with “something” and couldn’t go to class. No problem, he said.

Okay, I see this is getting long, so let’s get to the high points.

UVa was matched up against Oklahoma in the first game, and Michigan and North Carolina played in the second game. The Sooners were picked by everyone to crush UVa. They had Stacey King, who later went on to win 3 NBA titles with the Chicago Bulls (perhaps another player for Chicago was more responsible for that). Mookie Blaylock was their point guard. I mention him because his name was Mookie. Mookie is a neat name. Not many people are named Mookie. Do you know anyone else named Mookie? Not me.

UVa shocked the world. A nip-and-tuck game the whole way, UVa pulled ahead in the last 2 minutes, and we were victors! UVa’s weapon was a player named Richard Morgan. He wasn’t consistent, but when he was on, he was on and could shoot from anywhere. Way up in the upper tiers of the arena, we went absolutely bezerk, and that’s how I spell that word, so no complaining. This is a spell-freedom post. We stuck around for the second game, and to our ACC surprise, Big Blue was better than Carolina Blue. And they kept playing that dang song, “duh…duh, duh..duh, duh, duh…” It made me sick. But we’d get them in the next round, right?

We won on Thursday night and then had to find a place to stay. Keith’s cousin said we could stay with her, but a drive through the Kentucky night brought us to an empty home in a far away suburb. So we went back up to Lexington and found a room at a motel, something like “The Fisherman’s Motel,” in the center of the country far away from any sizeable body of water.

It took about 10 seconds to fall asleep. In the morning we awoke to a bright sun and found that a touring rock band was staying in the room next to ours. I think they towed their equipment in a U-Haul, so they weren’t incredibly successful. Today, they’re probably a banker, psychologist, and high school math teacher. Among our group, we were all doing fine in school, but Chris was the stand-out, and not just because he stood 6-4. He was just smart, freaking smart. And worse, he worked hard, freaking hard. He could’ve been drunk his entire college career and showed up for final exams high, and he would’ve gotten A’s, I’m absolutely certain. I believe there was a small window of time when he considered trying this… Well, not really. He wouldn’t have done that. He was an E-school student, that is, an engineer. He studied a simple subject – nuclear engineering. He went on the serve in the Navy for a few years, then switched on a dime to become a specialist on companies and innovation. He now teaches this stuff at Dartmouth and has an article in the Harvard Business Review about once every six minutes.

Well, that Friday, while the rest of us were killing time playing hearts, Chris unloaded his super-duper Commodore computer from the trunk of Keith’s tiny car and worked through the day. When I opened the door to get some sun, the band looked in and saw Chris typing away. We were so proud!

The next day we went to the game all psyched and full of excitement. It took Michigan 5 minutes to pop our balloons. Glen Rice, damn him, could not miss. Hit from the top of the key, hit from the corner, the top of the key…and on and on. UVa couldn’t hit the side of the barn. Well before halftime the game seemed already long decided. We had to suffer through another hour and a half of humiliation. Then that darn forsaken music, “duh…duh, duh..duh, duh, duh…”

We left the arena deflated, but we found a way to raise our spirits. Like Lu Xun’s character Ah Q, we found a way to find victory in defeat. Driving east on Route 64 back toward Virginia, a car pulled passed us and we saw it had a lot of dark blue & yellow flags and paraphernalia all over it. U Michigan scum hid within the doors. Well, heck with them. “Pull up next to them,” Daren said. “I’m gonna moon them.” Is he nuts? Well, perhaps. But why not? So Keith raced the engine of this tiny white car, and got up close. Daren stuck his cute ass against the right window. If there hadn’t been glass, the driver of the other car could easily have reached over and wiped him. But with the glass, my impression is that this caused his ass to spread across the window, making it even larger and a site to behold for the folks driving next to us, not to mention to the horses grazing along the side of the road.

We got them! They decelerated pretty quickly, shocked by what they saw. Then a minute later, they pulled up alongside, and one of them returned the favor. Not a pretty sight in the least. And so much for respect of intellectual property rights. As Daren said, “Imitation is the highest form of flattery.” With that, we had a long, but satisfying drive back to camp…no, to the grounds.

To bring things full circle, tonight there is no UVa, Oklahoma or Michigan playing. Carolina is, but I can’t root for or against them. But the U. Michigan coach from that game, Steve Fisher is coaching San Diego State, and they’re playing tonight against the Connecticut Huskies. The best footnote to the 1989 game is that Fisher inherited the team suddenly from coach Bill Frieder, who ran out at the end of the 1989 regular season to take a job with Arizona State. Can you imagine how he must have felt having jumped ship and then watching his former team win it all? Oops!

March 23, 2011

The American Chamber of Commerce in China released its annual business climate survey on Tuesday, and the results indicate that the business climate is improving and quite favorable to their members.

Among the key findings:

1) Companies that reported being "very profitable" jumped from 6 to 13% between the 2010 and 2011 surveys. The total proportion of profitable companies rose from 71 to 78% during this time. Only 6% of companies said their revenues went down in 2010.

2) 61% of companies produce in China primarily for the Chinese market, and do not use China as an export platform (18%).

3) Chinese protectionism is a worry for a significant proportion of members (23%), but just as many or more are worried about labor costs (23%), a global economic slowdown (27%), and a slowdown in China (31%). 26% say their firms are being harmed by China's Indigenous Innovation policies, compared to 68% who feel no effect and 6% who say the policy has helped them. 30% of respondents said they believe enforcement of intellectual property rights is "effective," up from 26% in 2010.

In short, it appears that although operating in China is difficult and a variety of industrial policies are presenting new challenges, the overall market is growing fast enough such that incomes are growing and the pain of these industrial policies is still not acute for most foreign companies.

March 20, 2011

I usually hate re-makes, but I was looking forward to seeing the new version of the 1984 movie Red Dawn. The original centered on how Americans in a small town repelled a Russia invasion. The new version was supposed to feature Chinese invaders bearing down on Michigan. But apparently because of concerns of how the movie would affect its business with China, the movie is being re-made to substitute North Koreans for Chinese.

A very good article in the Los Angeles Times reports that "the filmmakers now are digitally erasing Chinese flags and military symbols from "Red Dawn," substituting dialogue and altering the film to depict much of the invading force as being from North Korea, an isolated country where American media companies have no dollars at stake."

MGM may have saved some China business, but they're going to lose me. I'm not worried in the least about a North Korea invasion of the US. I think the chances of the Chinese crossing the Pacific are also ridiculously small (and I don't like fear-mongering against any country), but the thought plays into the collective American imagination, however warped, of a threatening China on the rise and on the march. North Korea scares Americans because it has nuclear weapons, and that doesn't fit with the premise of Red Dawn.

March 13, 2011

The WTO ruled on Friday that America's simultaneous institution of antidumping and counterveiling duties on the same Chinese products violates basic WTO rules. This is the most important ruling in China's favor during the first decade of its membership in the world trade body.

A WTO panel originally ruled in October against China and for the United States. Two issues were central to the case: whether the US could simultaneously institute AD and CVD penalties against Chinese products, and whether to characterize Chinese state-owned enterprises and state-owned financial institutions (banks) as "public bodies," that is, as government-like organizations whose activities inherently benefitted from subidization. In December the WTO panel found for the US on both issues, a decision that was absolutely disastrous for China. Not only did the WTO condone extremely high US trade penalties, it characterization of all SOEs and banks as public bodies meant that China would be vulnerable to high trade penalties in perpetuity simply because the state-owned sector is such an important component of the economy. Even private companies would have been seen as constant recipients of subsidies as long as they did business with SOEs or borrowed a dollar from a Chinese bank.

When China joined the WTO, it agreed that in its first 15 years of membership it could be treated as a non-market economy in the context of trade remedies cases. This has made it easier for China's trade partners to slap high tariffs against Chinese goods without needing to collect the requisite data from Chinese companies about product prices and costs. But China was looking forward to this situation expiring on December 11, 2016, and moreover, it had already persuaded over 80 countries to formally recognize it as a market economy.

The latest decision pulls China back from the precipice. Not only did it find that the way the US instituted dual penalities resulted in double counting; even more importantly, it rescued China from being permanently treated as a non-market economy, essentially a trade penalty pinata for anyone to take a whack at whenver they desired. Chinese banks are still vulnerable to such charges (and this could be critically important in future disputes), but the finding that SOEs are not inherently public bodies is incredibly important.

If the original ruling had stood, China and other countries with a substantial state-owned component to their economies would permanently have been treated as second-class citizens in the WTO. While beneficial to certain interests in the US and elsewhere, it would have reduced the WTO's legitimacy in the eyes of China. And keeping China committed to the system is extremely important to everyone who wants to limit the expansion of protectionism and generate global economic growth.

March 12, 2011

China's National People's Congress is meeting in Beijing this week to, among other things, adopt the 12th 5-Year Plan (2011-2015). I've co-written an article analyzing the plan with Wang Qun, an IU doctoral student and the RCCPB's program officer. The article was just published on the website of Foreign Policy. Unfortunately, they weren't able to include a handy table we developed that compares the goals of this new plan with that of the 11th 5-Year Plan (2006-2010). You can see that by clicking here > Download Data 11th 12th 5Yr Plans Mar 11.

One issue we didn't have space to elaborate on in the article is the the growing distance between central plans and actual economic behavior. Standing between the two are a whole series of policies, laws, and regulations that wait to be adopted, and equally important, companies, industry associations, other NGO's, and individuals. They will both contribute to the content of more specific policies and be directly involved in the economic implementation. Their preferences and actions are only partly shaped by government desires. That said, we do think that on the whole the goals described in the new plan are generally achievable.

March 11, 2011

I'm leading a delegation of IU professors, Indiana business executives, and local journalists on a trip to Hangzhou and Shanghai during Spring Break. We leave in a few hours. We'll land at Shanghai's Pudong International Airport, then take a two-hour bus ride to Hangzhou. There we'll participate in a conference hosted by Zhejiang University, IU's strategic partner in China. Because Indiana and Zhejiang are both along the coast, it's natural they are sister state-provinces. :)

Following the conference, we'll visit with the Zhejiang government, a TV station, and tour several companies, including Alibaba and Geely. We'll then make our way to Shanghai, with a few more visits, including to Crown Biosciences, founded by former IU professor and Eli Lilly researcher, Faming Zhang. We'll also tour Shanghai General Motors, Cummins Fleetguard, and the LCD/flat panel manufacturer Tianma.

While I'm thrilled to be traveling with my colleagues and three terrific entrepreneurs -- Mat Orrego of Cornerstone Information Systems, Matthew Neff of University Health Management and CHV Capital, and Ben Shobert of Teleos -- I'm particularly excited about the two journalists coming with us, Chris Fyall of the Bloomington Herald-Times and Greg Andrews of the Indianapolis Business Journal. The Midwest media covers China some, but not to the extent it needs to. So our center created a program to help Indiana journalists better understand China and figure out how to report on the country in a way that is relevant to their audience. Chris and Greg are visiting China for the very first time. I've visited so often that it's easy to lose the thrill of the trip. Not this time. To make things even more exciting, Greg is Greg Lattimore Andrews. His great uncle was Owen Lattimore, one of the West's first China specialists. Owen and Greg's grandmother, Eleanor, lived in Shanghai from 1904 to 1920. One scholar we are meeting translated Owen Lattimore's memoirs. Now if we could only find where the Lattimores lived, that would be so, so cool.

I'll write more in this space as the trip progresses. But you can also follow us through the blog, "IU Takes You to China" (印大华夏行). Its author is George Vlahakis, a manager in IU's Office of University Communications. This is also George's first trip, and I'm excited to see China through his eyes.

(Full disclosure: Faming Zhang, Mat Orrego, and Ben Shobert are on the advisory board of the Research Center for Chinese Politics & Business, which I direct.)

No one in the English-speaking world cares what I think about this, but I was fortunate enough to be interviewed by the very cool Chilean paper El Mercurio in early February. Try out your Spanish. For those who won't, in a nutshell, I think the chances of the political uproar in the Middle East, including in Egypt, having a serious effect on China's political stability, that is, CCP rule, is smaller than small. Beijing may be worried sick about this, but they shouldn't be. 30-plus years of economic growth, greater socio-economic liberalization, and greater international influence and prestige has resulted in greater domestic popular support for the regime. Study after study shows this. Someone please pass along the data to Beijing.

Yes, this may seem like old news to you, but I've been offline for a few weeks and have some thoughts about the ad that weren't captured in other commentary.

I agree with the conventional wisdom that the ad tanked and did not give Americans a positive impression of China or Chinese people. The ad more than likely had the opposite effect. Yes, the people shown wore familiar "Western" clothing and did not seem exotic. And the average American might even recognize one or two of them, such as Yao Ming. But unless you watched the ad many times, anyone would have a hard time picking out individuals. As research found for me by IU political science doctoral student Edwin Way suggests, these folks look very competent, but competency often is accompanied by the quality of being cold, not compassionate.

Here's a key quote from this 2008 study by Cuddy, Fiske and Glick:

Groups perceived as warm and competent elicit uniformly positive emotions and behavior: admiration, help, and association. Those perceived as lacking both warmth and competence elicit uniform negativity: contempt, neglect, and attack. But most group stereotypes appear high on one dimension and low on the other: the ensuing ambivalent affect and volatile behavior endanger constructive intergroup relations. High warmth wth low competence yields pity and patronizing help or neglect. Low warmth with high competence evokes envy and strategic association or, under threat, attack. (p. 137).

Also significant is not only who is in the ad, but who is not. All of those shown are extremely successful, and in fact, not "typical" Chinese. Such an ad, which I think would've been more successful, would have featured farmers, migrants, construction workers, teachers, and children -- lots of children. And while red is a popular color in China, when Americans think of China and red, they have one thought -- Red China, that is, Communist China.

Why did they make these mistakes? Because it's very likely the ad's producers, like all advertising agencies, wanted to please their client -- the Chinese government. This is typical.

My mother, Karen Kennedy, who ran a successful ad agency for about two decades, reports to me that this is a typical dynamic of the profession:

It’s hard to blame the agency, even if they are from Shanghai—though I agree a really strong and principled US agency would have done a better job. The problem, I believe, lies with whomever commissioned the ad. I believe they were determined to get their way and had certain preconceived notions about how the ad should look and feel. The truth is most agencies are whores and will do what the client says; if not, the client will merely walk across the street.

And the client -- the Chinese government -- has shown repeatedly it has a hard time putting itself in the shoes of Westerners and shaping arguments they would find appealing and persuasive. As a quote from "A Father's Book of Wisdom," given to me by a local Bloomington bank says, "We do see things as they are. We see things as we are."